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April 29, 2018

U.S. Trade Representative Releases 2018 Special 301 Report

On April 28th, Ambassador Robert Lighthizer, U.S. Trade Representative (USTR), issued the 2018 Special 301 Report. According to the USTR website, "[t]he ideas and creativity of American entrepreneurs fuel economic growth and employ millions of hardworking Americans" and "[t]his report sends a clear signal to our trading partners that the protection of Americans' intellectual property rights is a top priority of the Trump Administration," language reiterating last year's Report and consistent with much of the trade-related rhetoric emanating from the White House this year. The press release accompanying the report again recites statistics as the basis for these views, citing government estimates that 45.5 million American jobs that depend (directly or indirectly) on IP-intensive industries, representing 30% of all employment. The Report "calls on U.S. trading partners to address IP-related challenges" and "draws attention to IP-related trade barriers and the steps foreign countries can take to open their markets to IP-intensive goods—steps that help to protect U.S. jobs, create opportunities for job growth, and promote free and fair trade that benefits all Americans."

As it has done for the past several years over very different administrations, the Report highlights China as a country in which both "[l]ongstanding and new IP concerns merit attention," including with respect to "coercive technology transfer requirements, range of impediments to effective IP enforcement, and widespread infringing activity" (enumerated as "trade secret theft, rampant online piracy and counterfeit manufacturing"). It is the 14th consecutive year that China has been placed on the Priority Watch List, which as it sounds reflects greater concern and greater scrutiny.

The USTR also cites India for what he calls "longstanding challenges in its IP framework and lack of sufficient measurable improvements, particularly with respect to patents, copyrights, trade secrets, and enforcement, as well as for new issues that have negatively affected U.S. right holders over the past year."

Canada once again is singled out, being "downgrade[d]" from the Watch List to the Priority Watch List, for "for failing to make progress on overcoming important IP enforcement challenges." These include "key concerns" related to "poor border enforcement generally and, in particular, lack of customs authority to inspect or detain suspected counterfeit or pirated goods shipped through Canada, concerns about IP protections and procedures related to pharmaceuticals, deficient copyright protection, and inadequate transparency and due process regarding the protection of geographical indications."

The Report also announces that the USTR has closed "Out-of-Cycle" reviews of Kuwait albeit "without a change in status", because, inter alia, the country "has not yet brought its copyright regime in line with its international commitments and still needs to make necessary improvements to the regulations implementing its 2016 Copyright and Related Rights Law." Closure of OCR of Tajikistan resulted in that country being downgraded to the Priority Watch List, for "fail[ing] to address unlicensed software use by government agencies during the OCR." The USTR also announced that he will begin an OCR Colombia, Kuwait, and Malaysia.

The Report is promulgated pursuant to Section 182 of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness Act of 1988 and the Uruguay Round Agreements Act (enacted in 1994). The Trade Representative is required under the Act to "identify those countries that deny adequate and effective protection for IPR or deny fair and equitable market access for persons that rely on intellectual property protection." The Trade Representative has implemented these provisions by creating a "Priority Watch List" and "Watch List." Placing a country on the Priority Watch List or Watch List is used to indicate that the country exhibits "particular problems . . . with respect to IPR protection, enforcement, or market access for persons relying on intellectual property." These watch lists are reserved for countries having "the most onerous or egregious acts, policies, or practices and whose acts, policies, or practices have the greatest adverse impact (actual or potential) on the relevant U.S. products."

The USTR reviewed "more than 100" of this country's trading partners and identified twelve countries on a "Priority Watch List" (increased by one from last year) and another 24 countries on the "Watch List" (also increasing by one from last year), all relating to deficiencies in intellectual property protection in these countries. The Priority Watch List in the 2018 Report adds Canada to those countries cited in the 2017 Report (Algeria, Argentina, Chile, China, India, Indonesia, Kuwait, Russia, Thailand, Ukraine, and Venezuela). Countries on this list "present the most significant concerns this year regarding insufficient IP protection or enforcement or actions that otherwise limited market access for persons relying on intellectual property protection." On the Watch List this year are Barbados, Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Egypt, Greece, Guatemala, Jamaica, Lebanon, Mexico, Pakistan, Peru, Romania, Switzerland, Turkey, Turkmenistan, Uzbekistan, and Vietnam. Saudi Arabia, Tajikstan, Thailand, and the United Arab Emirates were added, Bulgaria was removed, and Canada and Columbia moved to the Priority Watch List this year.

The Report also notes the USTR's continued efforts to enhance public engagement. In addition to written comments (from 62 interested parties, including 23 trading partner governments), there was a public hearing on March 8, 2018 that heard testimony from "representatives of foreign governments, industry, and non-governmental organizations" (where the comments and a transcript of the hearing are available on the USTR website).

The Report identifies "foreign trading partners where IP protection and enforcement has deteriorated or remained at unacceptable levels and where U.S. persons who rely on IP protection have difficulty with fair and equitable market access." The Executive Summary captures this Administration's combative tone:

The Report reflects the resolve of this Administration to call out foreign countries and expose the laws, policies, and practices that fail to provide adequate and effective IP protection and enforcement for U.S. inventors, creators, brands, manufacturers, and service providers. The identification of the countries and IP-related market access barriers in this Report and of steps necessary to address those barriers are a critical component of the Administration's aggressive efforts to defend Americans from harmful IP-related trade barriers.

The Report contains two Sections (on "Developments in Intellectual Property Rights Protection and Enforcement" and "Country Reports") and two Annexes on particular issues (the statutory bases of the Report, and government technical assistance and capacity building efforts). In Section I, the Report reiterates its raison d'etre, that:

IP infringement undermines U.S. competitive advantages in innovation and creativity, to the detriment of American businesses and workers. In its most pernicious forms, IP infringement endangers the public, such as through exposure to health and safety risks from counterfeit products like semiconductors, automobile parts, apparel and footwear, toys, and medicines. In addition, trade in counterfeit and pirated products often fuels cross-border organized criminal networks and hinders sustainable economic development in many countries. Fostering innovation and creativity is essential to U.S. economic growth, competitiveness, and an estimated 45 million American jobs that directly or indirectly rely on IP-intensive industries. USTR continues to work to protect American innovation and creativity in foreign markets with all the tools of U.S. trade policy, including through the annual Special 301 Report.

It then reviews "initiatives for strengthen IP protection and enforcement," which includes "examples of initiatives to strengthen IP protection and enforcement; illustrative best practices demonstrated by the United States and our trading partners; [and] U.S.-led initiatives in multilateral organizations; and bilateral and regional developments." It also highlights areas of continued concern, including "counterfeits, online piracy, forced technology transfer, innovative pharmaceutical products and medical devices, and geographical indications (GIs)." As in earlier years, it mentions how important IP protection is to innovations in the environmental sector. Finally, Section I includes a discussion relating to "the importance of full implementation of the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and developments on the U.S. use of WTO dispute settlement procedures to resolve IP concerns."

In a section entitled "IP Protection and Enforcement and Related Market Access Challenges," the Report discusses innovation in the pharmaceutical industry, medical devices and market access concerns. In this regard the Report states that "USTR has been engaging with trading partners to ensure that U.S. owners of IP have a full and fair opportunity to use and profit from their IP, including by promoting transparent and fair pricing and reimbursement systems." These efforts have included "ensur[ing] robust IP systems; reduc[ing] market access barriers to pharmaceutical products and medical devices, including measures that discriminate against U.S. companies, are not adequately transparent, or do not offer sufficient opportunity for meaningful stakeholder engagement; and has pressed trading partners to appropriately recognize the value of innovative medicines and medical devices so that trading partners contribute their fair share to research and development of new treatments and cures" (echoing the "fair share" mantra recited by the President in stump speeches and tweets). The Report calls out in this regard the following efforts in particular countries:

• Canada and Mexico: in the context of renegotiating the North American Free Trade Agreement (NAFTA), seeking strong IP provisions, and provisions to "ensure that national-level government processes for the listing and reimbursement of pharmaceutical products and medical devices are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products";

• Japan: as part of "the U.S.-Japan Economic Dialogue," seeking "to ensure transparency and fairness and address other concerns with respect to pharmaceutical and medical devices pricing and reimbursement policies";

• China: here, there are "a range of issues affecting the pharmaceutical sector, negotiate to provid[e] for effective protection against unfair commercial use, as well as unauthorized disclosure, of test or other data generated to obtain marketing approval for pharmaceutical products, as well as expediting its implementation of an effective mechanism for the early resolution of potential patent disputes";

• India: obtain "meaningful IP reforms on longstanding issues," which include patentability and compulsory licensing criteria, protection against unfair commercial use and unauthorized disclosure of test or other data generated to obtain marketing approval for pharmaceutical products;

• Indonesia: address issues of Indonesian patent law, including patentability, compulsory licensing, and requirements for local manufacturing and use;

• Argentina: (somewhat ironically) discussing patentable subject matter as well as unfair commercial use and, like in many emerging countries, unauthorized disclosure of "undisclosed test or other data generated to obtain marketing approval for pharmaceutical and agricultural chemical products, among other issues";

• Saudi Arabia: patent enforcement and protections against commercial use, and also unauthorized disclosure of "undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, among other issues"; and

Compulsory licensing poses particular concerns with regard to pharmaceuticals and medical devices, according to the Report, because "[s]uch actions can undermine a patent holder's IP, reduce incentives to invest in research and development for new treatments and cures, unfairly shift the burden for funding such research and development to American patients and those in other markets that properly respect IP, and discourage the introduction of important new medicines into affected markets." Even when compulsory licenses are justified they should be used in only "limited circumstances" and only after attempting to negotiate with the rights holder; the Report cited these concerns particularly with Chile, Colombia, El Salvador, India, and Malaysia. More generally, the Report points to "non-transparent" and discriminatory practices and "unreasonable regulatory delay" as being of concern to the USTR and administration. In contrast, national systems that accelerate approval based on regulatory in other countries is praised in the Report. The Report notes that stakeholders have identified industries have expressed concerns regarding the policies of several trading partners, including Algeria, Australia, Canada, China, Colombia, Ecuador, Japan, Korea, New Zealand, and Turkey with regard to these issues, citing specific examples falling within these general categories for each country.

The Report next turns to technology transfer issues, including innovation by indigenous peoples and "localization." In this portion of the Report, compulsory technology transfer is emphasized as causing difficulties for American innovators, particularly in China. The Report identifies the anti-innovation cycle of imposing such measures to incentivize local innovation, which leads to create market entry barriers and thus discourages foreign (i.e., U.S.) investment, which not only hurts domestic industry in those countries but also can produce "non-market distortions" which in turn can lead to "suboptimal outcomes." The Report sets forth a litany of these practices, including requirements for technology transfer as the price for regulatory or other governmental approval; permitting state-owned enterprises to seek "non-commercial terms" for IP licensing or otherwise; providing unfair competitive advantage to local industry (if only passively by permitting U.S. IP-rights infringement); permitting cyber-intrusions; giving preference to local products and services dependent on indigenous IP; "[m]anipulating" processes of standards to prefer local concerns; and conditioning regulatory approval or other governmental approvals on disclosure of confidential business information and then "failing to protect such information appropriately." China, Indonesia, Nigeria, and Turkey are particularly cited for these concerns.

Trade secret protection, or lack of it, is also a concern discussed in the Report. It cites "growing need for trading partners to provide effective protection and enforcement of trade secrets" in "a wide variety of industry sectors, including information and communications technologies, services, pharmaceuticals and medical devices, environmental technologies, and other manufacturing" areas. The Report cites "various sources, including the U.S. Office of the National Counterintelligence Executive (ON- CIX)" for reporting these concerns, which are discussed in the Report with specificity regarding Brazil, China, India, Indonesia, and Nigeria for a wide variety of trade secret related breaches, including permitting (or not stopping) departing employees from taking with them trade secret information-containing electronic storage devices, cyber intrusion and computer hacking, misuse of trade secrets disclosed to government agencies, for example, as part of a regulatory approval process, and others. The Report on a positive note cites efforts by China, the European Union, and Taiwan to address these issues (albeit noting that China's efforts have come up short), and supports he Organization for Economic Co-operation and Development (OECD)'s work on trade secret protection.

The Report next addresses geographical indications (GIs) issues (which is ironic, in view of the Administrations withdrawal from the Trans-Pacific Partnership treaty, which addressed this issue in a U.S-friendly fashion). The Report cites U.S. efforts "through bilateral and multilateral channels" to improve U.S. access to a variety of goods having geographic specificity, as the Report states the issue where the goods identifier includes "place names (or words associated with a place) and identify products as having a particular quality, reputation, or other characteristic essentially attributable to the geographic origin of the product." This is a particular problem with the EU where it poses a significant barrier to entry (for example, for U.S.-sourced parmesan or feta cheeses), and the bases for the issue (including impairment of trademark and trade dress rights and interference with international standards) are discussed in depth. Part of the reason for U.S. concern is frankly admitted to be that "[t]he United States runs a significant deficit in food and agricultural trade with the EU" and "[t]he EU's GI system contributes to this asymmetry in U.S.-EU trade in agricultural products for products subject to the EU's GI regime." The Report also notes that this issue is being addressed in bilateral or multilateral agreement with other nations, including Argentina, Brazil, Canada, Chile, China, Colombia, Costa Rica, Ecuador, Indonesia, Japan, Malaysia, Mexico, Morocco, Paraguay, the Philippines, South Africa, Tunisia, Uruguay, and Vietnam.

The Report next addresses border control and criminal enforcement against counterfeiting; insofar as placement of the issues discussed in the Report indicates the importance the Trump administration places on them this is a change from the prior administration. Counterfeit goods (including "semiconductors and other electronics, chemicals, automotive and aircraft parts, medicines, food and beverages, household consumer products, personal care products, apparel and footwear, toys, and sporting goods") "make their way from China" and other countries, particularly those having an "ineffective or inadequate IP enforcement system." The Report states that such counterfeit goods harm "consumers, legitimate producers, and governments," particularly with regard to medicines, automotive and airplane parts, and food and beverages" because the counterfeit products do not meet the "rigorous good manufacturing practices used for legitimate products." The Report enunciates particular concern for such activities in China, Hong Kong, India, Indonesia, Singapore, Thailand, Turkey, and the United Arab Emirates, and alleges that 90% of all counterfeit drugs entering the U.S. come from China, the Dominican Republic, Hong Kong, and India, with China and India being particularly singled out as a source of counterfeit drugs. The USTR notes the efforts of ICANN to withdraw the Registrar Accreditation Agreement for Nanjing Imperiosus Technology a known Internet-based source of counterfeit medicines. Accordingly, the Report "urges" U.S. trading partners to "undertake more effective criminal and border enforcement against the manufacture, import, export, transit, and distribution of counterfeit goods" and states that the Office engages trading partners bilaterally, through trade agreement and international organizations on this issue.

The Report next turns to online and broadcast piracy of copyrighted works (again, seemingly of less important to this administration than the prior one), citing the "increased availability of broadband Internet connections around the world" as being a "boon" to the U.S economy and foreign trade. But while advances in technology have enabled U.S. creative producers to better distribute copyrighted materials it has also made the Internet "an extremely efficient vehicle for disseminating infringing content, thus competing unfairly with legitimate e-commerce and distribution services that copyright holders and online platforms use to deliver licensed content." A variety of forms of this issue are discussed in the Report, which names China, India, Mexico, Peru, and Vietnam for optical piracy; Canada, China, Cyprus, India, the Netherlands, Russia, Switzerland, and Ukraine for "commercial-scale online piracy; Canada, Mexico, the Netherlands, Saudi Arabia, Sweden, and Switzerland for "stream-ripping" (which is "the unauthorized converting of a file from a licensed streaming site into an unauthorized copy" and is now a "dominant" method for music piracy); and Argentina, Brazil, Chile, China, Hong Kong, Indonesia, Mexico, Peru, Singapore, Taiwan, and Vietnam for the use of illicit streaming devices. Illicit camcording continues to be a particular concern in the Report, with Brazil, Canada, China, Ecuador, India, Japan, Mexico, Peru, the Philippines, Russia, and Taiwan being cited in this regard. Other aspects of copyright enforcement contained in the Report are royalty payment and administration regimes including collective management organizations (CMO), which the Report states are "flawed or non-operational" in many countries (Argentina, India, Korea, the UAE, and Ukraine, specifically).

Trademarks and impediments to obtaining and enforcing them in some countries make up the next topic in the Report, with Brazil, China, India, Malaysia, and the Philippines, having "slow" opposition proceedings and Russia and Panama having no administrative opposition proceedings. Even registering (i.e., making a record of) trademarks is problematic in some countries, with "unnecessary administrative and financial burdens" imposed on owners and there being unnecessary difficulties in maintaining and enforcing trademarks (albeit without naming any countries where these and other difficulties contained in the Report have arisen). There are also issues with cybersquatting and particularly with country code top-level domain names (ccTLDs) for U.S. rights holders. The governments of Argentina, Chile, China, Costa Rica, Greece, Kazakhstan, Korea, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, and Vietnam are named for unlicensed use of software, and the Report cites a commercial value for such illicit use of software at $52 billion worldwide.

The Report sets forth efforts related to initiatives to strengthen IP protection and enforcement in foreign markets, either supported or assisted by the U.S. (in Bosnia and Herzegovina, Bulgaria, China, Greece, India, Jordan, Kuwait, Pakistan, Taiwan, Thailand, and the United Arab Emirates) and sets forth "illustrative best IP practices" in detail for Brazil, India, Jamaica, Malaysia, Spain, and Thailand. The Report also discussed bilaterial, regional, and international agreements.

Section I of the Report ends by mentioning the role of intellectual property and the environment and intellectual property and health as areas of concern raised by stakeholders in their comments. In India, for example, compulsory licensing of "green" technology "will discourage, rather than promote, investment in and dissemination of green technology innovation, including those technologies that contribute to climate change adaptation and mitigation." The Report contains an affirmation of the provisions regarding IP and public health set forth in the Doha Declaration and states that it "recognizes the role of IP protection in the development of new medicines, while being mindful of the effect of IP protection on price" (a change from the pledge not to interfere with Doha provisions permitting compulsory licensing under certain specified conditions contained in earlier Section 301 Reports). And the final portion of the Report discusses efforts at dispute resolution of IP matters under the GATT/TRIPS provisions as they are implemented by the WTO.

Finally, the last portion of Section I of the Report relates to dispute settlement and enforcement. It states that while the U.S. believes that "[t]he most efficient and preferred manner of resolving concerns is through bilateral dialogue," when that doesn't work "the United States will use enforcement tools including those provided under U.S. law, the WTO and other dispute settlement procedures, as appropriate." Specifically cited is the August 14, 2017 Presidential Memorandum regarding an investigation by the USTR of "laws, policies, practices, or actions of the government of China that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development" (82 FR 39007) and its subsequent institution on August 18, 2017. The Report notes that the investigation reported, in March 22, 2018 that "the investigation supports findings that acts, policies, and practices of the China related to technology transfer, intellectual property, and innovation covered in the investigation are unreasonable or discriminatory and burden or restrict U.S. commerce" and the subsequent actions of the Administration to impose tariffs on Chinese goods. Other enforcement actions, mostly of historical significance, are also discussed.

Section II of the Report is a detailed, country-by-country discussion for each country on the Priority Watch List and the Watch List, relating to the activities (or lack thereof) of each country that results in placement of that country on these lists.

As it has for the past several years (and across otherwise very different Administrations), the U.S. Trade Representative Special 301 Report provides insights into both the concerns of U.S. IP rights holders and the Administration's intentions to work with, cajole, coerce, or threaten other countries to increase protection for IP rights of U.S. IP rights holders. The substance of the Report is decidedly more aggressive than Reports issued during the Obama Administration, and while the 2017 Report (the Trump administration's first) was less pugnacious than might have been expected, the tone of this Report is much more consistent with its stated policy positions. As with last year's Report, the tone and tenor of this Report is robustly assertive regarding IP rights and America's intention to negotiate international agreements and confront its trading partners in ways that protect American innovation and commercial interests first and foremost regardless of consequences.

For additional information regarding this and other related topics, please see:

Comments

Thanks Kevin.

When the United States reinstates patent rights, it can go back to lecturing the rest of world about IP laws. It appears that being unruffled by exhibiting the USA as a hypocritical bully is a common thread through successive presidential administrations.